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Fair value adjustment is a type of accounting process that allows the revaluation of the fair value when there is a material difference between that value and the current book value of an asset. Managing this type of adjustment requires some time to engage in what is known as reassessment, in order to bring the two figures closer to greater harmony. There are various reasons why a fair value adjustment may be necessary, including significant changes in the fair value of the assets involved, or when the assets are involved in a business acquisition.
The exact process for making such an adjustment will depend on the type of asset involved and what has occurred to create the widest disparity between the currently identified fair value and the carrying amount of that asset. For example, if the asset in question is real estate, the process will require identification of the current market value, based on increases or decreases in demand for similar properties in the immediate area. This can be compared to the current book value and fair market value and taken into account when determining a reasonable fair value for adjustment.
One of the most common approaches to fair value adjustment is to identify a similar event or situation to compare and then adjust accordingly. It is not uncommon for several similar situations to be considered, making it possible to effectively use the sum of these events to arrive at an adjustment that is within reason. First priority goes to events that are exactly the same as the situation cited for readjustment, and similar events are considered when and if no exact matches are available for analysis.
While a fair value adjustment is often based on factual information gathered in order to ensure that the adjustment is reasonable and logical, there may also be a degree of subjectivity. The idea is to limit the amount of subjectivity that is brought into the task and to strive to evaluate the available data as objectively as possible. This helps minimize the chance that the fair value adjustment will not actually address the underlying reasons for the disparity between the current carrying value and fair value, while increasing the chance that the fair value will be more in line with the current fair value. current fair value. market.